In Course #5 I explained the different parts of your trading system, and one of them is your “cost to trade”, which basically are the trading fees, the order book slippage and sometimes the delay in the execution of your algorithm/API. I also briefly talked about your account size. In this course, I will explain how leverage and trading fees (or slippage, or execution delay), can have a very big impact on your account size.
During this last year, I really spent countless hours brainstorming ways to trade with an algo in a profitable manner. One time, I had a great idea, using position sizing. I thought, what if I enter on the price crossing under the EMA 20 on the 5min timeframe. Using a SL placed at the low of the crossing candle (for a long) or the high of the crossing down candle (for a short), and risking only 1% of my account.
On paper, it sounded like an amazing idea: let’s run it through the assessment checklist from course #5.
Win rate: it was about 30%. I was getting stopped 70% of the time.
Relative size of wins/losses: I would lose only 1%, since my position size was calculated in a way that when I get stopped out on that SL order, it would always equal 1%. But when I won these 30% of the time, the winners would be like 3 times my loss at least, so 3% and more.
Let’s looks real quick what it looks like in theory: on the below chart, I have 7 losses for 1% each and 3 wins for 3% each. Note that on my strategy, the 3% was the minimum. Sometimes I would get 8%, up to 20%. (So I was pretty pumped up).